Bloomberg News

Solyndra Failure Hits Goldman’s Reputation: William D. Cohan

September 26, 2011

(Updates in fifth paragraph with reference to KKR and in the parenthetical sentence of ninth paragraph with details on loan filing.)

Sept. 26 (Bloomberg) -- Since the financial crisis hit, investment banks have been rightly criticized for their tendency to be more concerned with their own trading profits than the well-being of their customers. Sometimes, however, an investment bank can take the whole client service thing a bit too far.

Take, for instance, the case of Goldman Sachs Group Inc. and its client Solyndra LLC, the California-based solar-panel maker that filed for bankruptcy protection on Sept. 6 and dismissed its 1,100 employees.

Solyndra has become infamous lately as the company that, with much political fanfare, was handed a large government loan and then went kaput. Solyndra is usually described as “politically connected” because President Barack Obama visited the company in 2010 and said that “companies like Solyndra are leading the way toward a brighter and more prosperous future.”

Also, one of the company’s major supporters was the George Kaiser Family Foundation; George Kaiser, a wealthy Oklahoma oil executive, was one of Obama’s bundlers of contributions during his successful 2008 presidential campaign. (A conservative website reported that, according to White House logs, Solyndra investors and management had made “no fewer than 20 trips” to the White House between March 2009 and April 2011).

Solyndra raised more than $650 million in equity financing from the likes of the Kaiser fund and KKR & Co. LP, the private- equity powerhouse, and then received a $535 million loan guarantee from the U.S. Department of Energy in March 2009, soon after Obama took office. Then it got the actual loan of $527 million from the Treasury, which is pretty odd since, with the Energy Department guarantee, it should have been easy to get a loan from the private sector.

In any event, much of the investors’ equity and the Treasury’s $527 million is probably gone as a result of the bankruptcy filing; Solyndra negotiated a new loan in February for $75 million with the condition that existing creditors --the Treasury and the ultimate guarantor, the Department of Energy -- be subordinated to the new money in the case of a bankruptcy filing.

Some Wall Street bankers put the enterprise value of Solyndra at no more than that last $75 million, meaning taxpayers may never recover anything. The company has said it intends to auction off its assets as quickly as possible, in part with the help of former Massachusetts governor William Weld, a partner in the law firm McDermott, Will & Emery, where he charges $895 an hour.

On Sept. 8, the Solyndra plot thickened again, when the FBI raided the company’s offices in connection with an investigation by the Department of Energy’s inspector general. And last week Solyndra executives pleaded the Fifth Amendment during their congressional hearing.

You would think that this kind of dicey situation would be one that a savvy Wall Street player like Goldman Sachs would know to avoid. Surely, you would think, Goldman would have some sort of internal credit committee that would put its foot down and insist that Goldman’s reputation was too important to be mixed up with a company with both an arrogant management team and a questionable business plan. (Solyndra’s advisers on the Treasury loan, including Goldman, split some $10 million in fees, according to a filing Solyndra made about the loan.)

You would also think the firm’s reputation police would put the kibosh on Solyndra, too. But Goldman, which Solyndra credited as the “exclusive financial adviser” on its Treasury loan application, kept the firm as a client through thick and thin.

According to a letter Joel Cannon, the chief executive officer of TenKsolar Inc., a Solyndra competitor, wrote to the Wall Street Journal, Solyndra failed not because of “cheap capital provided to Chinese solar companies by their government” making for stiff competition for the U.S. solar industry -- as the company would have one believe -- but because “its product cost was far too high and its performance far too low, and everyone who knew the solar business knew this.” Some Wall Street bankers who met the Solyndra management have told me that the flaws of management and the business plan were quickly apparent. Goldman apparently missed them.

But, surely, Goldman Sachs knew that Solyndra was a company, as Cannon pointed out, with a cost structure that made it difficult to finance? In 2008, soon after it was hired, Goldman tried to do a convertible debt offering for Solyndra. Yes, it was a tough time to raise any kind of financing for a relatively new company. Still, the reaction to the prospect of financing Solyndra from more than 100 investors Goldman contacted was a resounding no. Goldman axed the convert.

Goldman’s bankers also showed the deal to two of Goldman’s private equity funds -- a distressed fund and a fund that buys control stakes in companies -- and both these funds said no, too.

It’s not hard to see why Solyndra was being turned down: The company lost an accumulated $557 million from 2006 through the end of 2009, and its financial prospects were grim given its high cost structure.

But Goldman persisted on behalf of Solyndra. In September 2009, along with the Energy Department loan guarantee that made possible the $527 million Treasury loan, Goldman raised almost $200 million more in equity from Argonaut Ventures, an investment vehicle for the Kaiser foundation.

Armed with the Treasury’s millions, which finally flowed into Solyndra toward the end of 2009 at an annual interest rate of less than 3 percent, the company was off to the races. With the Treasury loan and Kaiser’s new equity in place, the company received an additional $50 million revolving loan facility from Argonaut, which by then owned nearly 36 percent of the company and was its largest shareholder.

In December 2009, Solyndra filed an initial public offering to raise an unspecified amount of other people’s money to continue to finance its nonsensical business plan, including the build-out of its second production facility and to pay off the Argonaut loan. Goldman was the IPO’s lead underwriter; Morgan Stanley was the only other underwriter listed on the SEC filing, called an S-1.

In March 2010, the S-1 was amended to reflect the company’s end of year financials and to add a few other changes to the document, most of which were fairly typical.

What was atypical was that the amended filing also contained a “going concern” qualification from the company’s auditors, PricewaterhouseCoopers. “There can be no assurance that, in the event the Company requires additional financing, such financing will be available on terms which are favorable or at all,” according to the amended S-1. “Failure to generate sufficient cash flows from operations, raise additional capital and reduce discretionary spending or to remain in compliance with the covenants contained in the DOE guaranteed loan facility or the Argonaut revolving credit facility, could have a material adverse effect on the Company’s ability to achieve its intended business objectives and continue as a going concern.”

That’s not the kind of statement that warms the hearts of investors, especially in 2010. Citing “adverse market conditions,” not surprisingly, Solyndra withdrew its IPO in June 2010. A year later the company was broke.

Although, as an analyst at Bloomberg New Energy Finance wrote recently, “risky technologies like Solyndra’s will always be as likely to be a complete failure as they are to be a success,” there were plenty of warning signs before Solyndra’s ignominious end that might have persuaded Goldman to stay away. No doubt the firm now regrets its involvement.

But how and why it got involved will no doubt make for interesting reading in future FBI documents, congressional hearing transcripts and inspector general reports.

(William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.)

--Editors: Tobin Harshaw, Stacey Shick

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To contact the writer of this article: William D. Cohan at wdcohan@yahoo.com.

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.


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